Ethics and Window Dressing
The date is November 18,2007. You are the chief executive officer of Omega Software—a publicly owned company that is currently in financial difficulty. Omega needs new large bank loans if it is , to survive.
You have been negotiating with several banks, but each has asked to see your 2007 financial statements, which will be dated December 31. These statements will, of course, be audited. You are now meeting with other corporate officers to discuss the situation, and the following suggestions have been made:
1. “We are planning to buy Word Master Software Co. for $8 million cash in December. The owners of Word Master are in no hurry; if we delay this acquisition until January, we’ll have $8 million more cash at year-end. That should make us look a lot more solvent.”
2. “At year-end, well owe accounts payable of about $18 million. If we were to show this liability in our balance sheet at half that amount—say, $9 million—no one would know the difference. We could report the other $9 million as stockholders’ equity and our financial position would appear much stronger.”
3. “We owe Delta Programming $5 million, due in 90 days. I know some people at Delta. If we were to sign a note and pay them 12 percent interest, they’d let us postpone this debt for a year or more.”
4. “We own land that cost us $2 million but today is worth at least $6 million. Let’s show it at $6 million in our balance sheet, and that will increase our total assets and our stockholders’ equity by $4 million.”
Instructions
Separately evaluate each of these four proposals to improve Omega Software’s financial statements. Your evaluations should consider ethical and legal issues as well as accounting issues.
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